China Merchants Hldgs (Pacific) - DBS Research 2016-02-29: Driving forward

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CHINA MERCHANTS HLDGS(PACIFIC) C22.SI 

China Merchants Hldgs (Pacific) - Driving forward 

• FY15 net profit of HK$597m below expectations, but final dividend of 3.5 Scts was intact 
• Recently acquired roads and modest organic growth to drive earnings expansion of 20% in FY16 
• Annual dividend of 7 Scts can be sustained 
• Maintain BUY, TP of S$1.25; stock offers 9% yield 

 A growing Pan-China toll road play. 

• We like China Merchants Holdings (Pacific) as a growing toll road operator in China, which is also paying an attractive level of dividends. 
• Bolstered by the acquisition of six toll roads in the last five years, and with continued firm support from its parent China Merchants Group, a top ten SOE in China, we believe the Group’s earnings is on a steady long-term growth path. 
• We recommend BUY, with a DCF-based TP of S$1.25. 

 Acquisitions to drive bottom-line expansion. 

• The recently completed acquisitions of Jiurui Expressway and three toll roads in Guangxi Zhuang Autonomous Region should propel the group’s top and bottom lines in the medium to long term. 
• We project CMHP’s core earnings to grow by 38% to HK$822m from 2015 to 2017F, driven by contribution from these recent acquisitions as well as modest traffic growth on its mature toll road assets. 
• Meanwhile, there remains room for debt-funded acquisitions should the right opportunity comes along, as net-gearing is not yet optimised at 0.6x. 

 Consistent and attractive dividend yields. 

• CMHP has been consistently paying attractive dividends to its shareholders (7 Scts per share per annum in the last two years). We project CMHP to maintain its 7-Sct payouts for FY16 and FY17, translating into an attractive dividend yield of over 9% at the current share price. 

Valuation: 

• Our 12-month target price of S$1.25 is based on DCF valuation with WACC of 9.8%, and offers > 60% upside with an attractive dividend yield of over 9%. 
• We see the stock rerating as it delivers earnings growth. 

Key Risks to Our View: 

• Exposure to Chinese economy and regulatory risks. Key risks for the group are 
  1. its 100% exposure to the Chinese economy and Rmb, 
  2. its earnings would be negatively impacted if toll rate tariffs are revised downwards.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-02-29

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.25 Down 1.45